Topline
Though the broader market stayed afloat Thursday, technology stocks continued to underperform, and experts are warning that the sector could sink further after a year of eye-popping gains that pushed the tech-heavy Nasdaq up more than 100% at its mid-pandemic peak.
Traders work on the floor of the New York Stock Exchange.
Key Facts
The Nasdaq ticked up 0.1% Thursday, but the index is still down 8% from its all-time high on February 12; meanwhile, the Dow Jones industrial average jumped 0.6% and is just 1% off its latest high last Wednesday.
David Bahnsen, the chief investment officer overseeing some $2.6 billion in assets at California-based The Bahnsen Group, said in a Thursday note that the “undeniable” weakness in tech stocks is a “good old fashioned repricing” after meteoric gains that pushed valuations “too high” during the pandemic.
Bahnsen expects the index’s underperformance to continue and likens the dynamic to the “strong historical precedence” set by the technology bubble popping in 2000–during which the Dow actually rose while the Nasdaq plunged.
“Ripe for a correction” is any stock trading for between 50 to 100 times earnings, which on the low-end, is more than twice as much as the S&P 500’s average price-earnings multiple of roughly 19, Bahnsen says.
That includes stocks heading up losses Thursday, including Netflix, down 3.5% and trading at 86 times trailing earnings, and Amazon, down 1.3% and trading at 75 times earnings; they’ve fallen 7% and 12%, respectively, from their highs late last year.
Other stocks at risk of a haircut include recent stay-at-home favorite Zoom Video Communications, pandemic darling Peloton, fintech Square and Tesla–all of which trade for at least 100 times earnings.
Crucial Quote
“The weakness in technology stocks is undeniable, but it likely won’t be a straight line down for the sector and there will be zigs and zags along the way,” Bahnsen says, noting that tech-stock valuations are generally “too high and screaming for a correction.”
Key Background
Rising interest rates have created headwinds for high-priced stocks in recent weeks, and Bahnsen doubled-down on that sentiment Thursday, saying that the surge in tech stocks was exacerbated by a near-zero risk-free rate. Investors looking for a return turned to the stock market, but with 10-year Treasury yields climbing more than 70 basis points over the past three months, expensive stocks are selling-off in favor of the risk-free asset class. Morgan Stanley estimates that firms in the S&P could be in for an average 18% valuation haircut, relative to earnings, for every 100 basis-point increase in 10-year Treasury yields.
What To Watch For
If the broader stock market weakens, Bahnsen says consumer staples will be the best defensive position, but if the market continues to climb, he thinks the recently booming energy and financials sectors will continue to outperform.
Further Reading
Covid-19 Recession: 10 Important Numbers That Sum Up America’s Economic Crisis One Year Later (Forbes)
Dow Falls 150 Points As Nike Plunges Over China Boycott And Alleged Ties To Forced Labor (Forbes)
Bitcoin, Tesla And GameStop: Ten Numbers That Sum Up The Fastest Market Recovery Ever (Forbes)
